Investors should stick pro-cyclical commodity stocks, especially oil / energy counters, which are the best way to play the reopening of the economy, advised Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors, GREED & fear.
This is despite Beijing’s recent efforts to talk down commodity prices, and despite concerns that a successful revival of the Iran 2015 nuclear deal will cause increased supply on the world oil market.
“Indeed both concerns should be used as opportunities to add to positions in the likes of copper stocks and oil stocks. The view here remains firmly that investors should stick with the pro-cyclical commodity trade, particularly energy. If GREED & fear had to favour one area of the cyclical trade the most it would be oil stocks. This is the commodity most geared to the re-opening trade as the vaccine rollout proceeds,” Wood said.
Brent crude oil prices have jumped over 93 per cent year-on-year to around $70 a barrel now. If experts are to be believed, there is more room for an upside as global economies emerge from lockdowns triggered by the Covid pandemic.
Global markets, according to a note by Goldman Sachs, are currently underestimating the demand for oil. The research and broking firm expects Brent crude oil prices to hit $80 per barrel going ahead. Recently, S&P Global Platts, too, had forecast oil prices hitting and staying above $70 a barrel by mid-2021, driven by a more broad-based pickup in economic activity amid widening vaccination rollouts.
Back home, most oil & gas stocks have done well at the bourses. The S&P BSE Oil & Gas index has rallied 14 per cent thus far in calendar year 2021 (CY21), as compared to around 7 per cent rise in the benchmark S&P BSE Sensex. HPCL, BPCL, IOC and ONGC have surged 20 per cent to 28 per cent during this period, ACE Equity data show.
Oil related stocks
G Chokkalingam, founder and chief investment officer at Equinomics Research, however, prefers to stay cautious on the oil & gas sector. Though he expects the crude oil prices to remain firm, public sector oil refiners and marketers, he believes, have limited headroom from here on.
“Oil prices are likely to rise from the current levels as more economies open up post vaccination against Covid. In India, the government cannot perpetually keep increasing prices of auto fuels. It will eventually have to cushion the blow by providing support or ask OMCs to absorb the rise in oil prices. I do not advocate buying oil & gas stocks at the current levels,” he says.
As regards India, analysts at S&P Global Platts expect 2021 oil demand to remain below the 2019 level, but higher than witnessed in 2020. The second half of 2021, it believes, will see an uptick in demand as more cities open for business after the lockdown triggered by the second Covid wave.
“India’s oil demand is expected to witness a growth of 260,000 barrels per day (bpd) year on year in the first half of 2021 (H1-2021), and 390,000 bpd year-on-year in (H2-2021). Demand in H2-2021 will be 700,000 bpd higher than H1-2021, driven by a more broad-based pickup in economic activity amid widening vaccination rollout. Expect India’s oil demand in 2021 to remain below the 2019 level, mainly due to a weak first half,” says Lim Jit Yang, advisor for Asia-Pacific oil markets at S&P Global Platts.